Innovation Nations: A Look at the Global Expansion of Venture Capital

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Innovation Nations- A Look at the Global Expansion of Venture Capital
Venture capital has a long history in the United States. Along with MIT President Karl Compton,
Ralph Flanders, Merrill Griswold, and Donald K. David, French-born Georges Doriot founded the
venture capital firm American Research and Development Corporation (ARDC), which was
incorporated under Massachusetts law on June 6, 1946. One of the most profound changes in the
venture capital business during the past two decades has been its globalization. Today, venture
capital flows to where it can multiply, regardless of its geography.
Despite the recent rise of venture capital in other countries, the U.S. remains the most active
investor in start-ups. Over the past decade, start-ups in the United States have raised $488 billion
from venture capitalists, according to data from Thomson Reuters. That’s about 65 percent of all the
money raised in the entire world from VCs. Start-ups in Canada raised the next-highest amount of
money, collecting $39 billion, less than a tenth as much, yet still more than both China and India
combined. Interestingly enough, 50% of venture capital in the United States is still raised in one
state, California. The Bay Area itself raises almost 38% of the U.S. total.
There are several strategies that a firm might consider when it decides to go global, depending on its
preferences for risk, the makeup of its partnership or the nature of the country it aims to invest in.
1. Invest directly in a start-up.
2. Open a foreign office.
3. Invest in a partnership that becomes LP and assigns operating partners (other VCs).
4. Affiliate with knowledgeable locals.
5. Acquire a foreign firm.
6. Partner with the local government.
Some firms prefer to keep their relations with foreign start-ups at arm's length. They fly to another
country, pick a start-up in an industry they know with a management team they know and trust, wire
funds and come home. Other firms prefer to open their own offices in a foreign country. This
strategy may be particularly well suited to firms that are more confident with native language
speakers and staff who have significant experience with the local culture, laws, rules and procedures.
U.S. venture firms have had some success partnering with each other to form new firms focused on
foreign countries. Others have worked to affiliate themselves with local investors. Both strategies
work well if the U.S. firm is a competent fundraiser and can help the local firm connect with U.S.-
based limited partners. Other venture capitalists would rather get into the foreign market faster and
simply buy a successful foreign investment firm.
Governments periodically try to stimulate innovation and create incentives to attract experts, though
these programs typically come with various strings attached. Thus, knowing how to invest abroad is
one thing; knowing where to invest is another. Many places have tried to replicate Silicon Valley's
unique confluence of innovation resources, but few have succeeded. The United States has
developed a very attractive environment for small companies that no other country has yet
replicated. People seem to be constantly asking: What makes Silicon Valley so successful at
commercializing innovation? Some attribute the area’s proximity to the best research and

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engineering centers such as Stanford and Cal Berkeley. Others say it has to do with the
geographically centralized venture capital industry, or even the concentration of large tech
corporations nearby; in other words, infrastructure. But where else might such an innovation
ecosystem emerge?
The number of start-ups financed and the total dollars financed in a given country might be the best
indicator of its ability to sustain further investment. Exhibit 8.1 shows which countries have had the
most active venture capital industries during the past decade. Of course each country or region has
advantages and disadvantages, some of which have opened opportunities while others have made
development more difficult. We’ll consider several of the areas of greatest interest. We believe that
some countries will eventually catch up to the United States, but start up formation and venture
capital financing is one of the few areas in business that the United States will continue to lead for
the foreseeable future. In fact, we believe that the U.S. will maintain that lead for at least another
generation (20-30 years or more), probably much longer.
Venture Capital Investment around
theWorld 2000–2010
Country
Number of
Start-ups
Investment
($ Billion) Country
Number of
Start-ups
Investment
($ Billion)
United States 19,398 $488.1 Australia 809 $6.2
Canada 5,920 $39.0 Spain 716 $6.2
United Kingdom 3,234 $36.8 Sweden 892 $5.9
France 2,605 $23.5 Israel 522 $5.5
China 1,174 $18.5 Italy 433 $5.3
India 1,052 $15.9 Brazil 303 $4.7
Germany 1,692 $13.3 Hong Kong 179 $4.3
Netherlands 727 $10.0 Denmark 394 $4.2
South Korea 2,433 $9.5 Singapore 213 $3.4
Japan 451 $7.1 Rest of
the world
4,599 $36.1
Source : Thomson Reuters

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China
China has the biggest venture capital industry outside the U.S. To compare the two, in 2011 U.S.
venture capitalists invested $26.5 billion in all deals. Out of that total, they funded 967 Internet deals
with $6.7 billion. By comparison, in 2011 Chinese VC’s invested $13 billion in all deals. Out of that
total, they funded 268 Internet deals with $3.2 billion. About 1/3 of all China’s VC investment is
made in Beijing and the majority of those investments are in the Technology, Media and
Telecommunications (TMT) sector. As vibrant as the China venture business has been, 2012 was a
different story. VC’s pulled back and only invested $3.7 billion in 202 deals, funding only 43 IT deals
with $563 million.
For the last 10 years China essentially closed its search, media and social network software market to
foreign companies with the result that Google, Facebook, Twitter, YouTube, Dropbox, and 30,000
other websites were not accessible from China. This left an open playing field for Chinese software
start-ups as they “copy” or “adapt, adopt and extend” existing U.S. business models. This closed

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but very large market means that greater than 90% of Chinese software startups focus exclusively on
the Chinese market. Chinese VC does not currently have a significant global infrastructure.
Nonetheless, we believe that companies like WeChat will push China into serious innovation mode.
To make this a complete transition, however, China’s innovation-driven economy will eventually
need intellectual property rights and anti-trust laws that are enforced. In addition, education seems
to still be one of China’s bottlenecks – rote lectures, passive learning, follow the process, exam-
based performance, etc.
Beijing Venture/Angel Ecosystem
Zhongguancun is the name of Beijing’s Silicon Valley, located in the northwest side of Beijing. Not
only does Zhongguancun have Chinese startups, but global technology companies (Nokia, Ericsson,
Motorola, Sony Ericsson, Microsoft, IBM, Oracle, BEA, Alcatel Lucent, and Google) all have
offices here or elsewhere in Beijing. While Beijing has VC’s and angel investors happy to write a
check, there aren’t as many angels/VCs in China versus US per capita. There’s a funding gap for
seed stage investments. The angel/seed network in Beijing is fragmented and mostly inexperienced
(as are a good number of the China VC’s). It’s still an immature market. Remember, auto sales in
China went from 1 million in 2001 to 14 million in 2011.
Liquidity
Unlike the U.S., there are almost no mergers or acquisitions in this market segment. According to
wildly successful entrepreneur Steve Blank, “It’s much easier to just steal their ideas and hire their
employees”. So, big companies rarely acquire startups. Liquidity for most Internet startups happens
via IPO’s. 70% of exits in China are via IPO (in the U.S. on NASDAQ or the NYSE or on
ChiNext, China’s equivalent of NASDAQ) compared to the 90% of exits in US via mergers or
acquisitions. Alibaba (commerce), Tencent (games/chat) and Baidu (search) all have market caps
over $40 billion.
Entrepreneurial Culture
Like most countries we looked at, China still has a pervasive fear of failure. The current cultural
pressure is to “work for a big company or the government.” Outward facing Universities are just
starting to appear, and while there’s a free flow of information inside China, it suffers from the
constraints of the Great Firewall. The second difference in ecosystems – the lack of freedom to
dissent – goes deeper to the difference between the two systems. As Steve Blank again so aptly puts
it, “In the U.S., entrepreneurs are encouraged to ‘Think Different’. Our touchstone for creativity is
the Apple ad that said, ‘Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the ones
who see things differently — they’re not fond of rules. You can quote them, disagree with them,
glorify or vilify them, but the only thing you can’t do is ignore them because they change things….’
This spirit of rebellion against the status quo got us Steve Jobs. In China the same attitude is likely
to get you jail time. Unless you can speak truth to power, you’ll never have an innovation economy”.

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Therefore, we think that, just like about everything else, China will eventually probably catch us in
the entrepreneurial economy. Their progress thus far is astonishing and China’s numbers (people)
and speed are really incomprehensible. At some point, however, they will need to reconcile
intellectual property rights. More fundamentally, it seems that state controlled capitalism doesn’t jibe
with the wild creativity needed to generate breakthrough innovation. This is probably the point at
which individuality will have to clash with the forces of state power. Even if individuality wins, it will
probably come at a tremendous price. None of us knows how long that will take or indeed, if the
outcome will even be positive.
India
India’s growing markets, new innovations, abundance of computer savvy specialists and strong
communications sector have attracted venture capitalists for years. There are, however, numerous
issues to take into consideration such as the complex listing requirements of stock exchanges,
complex taxes and its infamous bureaucracy. In addition, the lack of crucial infrastructure remains a
real problem. Despite this, Indian start-up companies have raised nearly $16 billion of VC in the
past decade. Many U.S. investors were emboldened by the success of Info Edge, the company that
runs online job site Nauru. The start-up raised money from Kleiner Perkins and Sherpalo Ventures.
Info Edge went public on the Bombay Stock Exchange in October 2006 and closed its first day of
trading at nearly double its offering price. The venture capitalists’ stake was valued at $75 million.
During the past three years, over 49 different venture capital firms invested $850 million in 53 e-
commerce companies. For example, Snapdeal, the online retailer, raised $50 million from three
different firms, beginning in April with an investment by eBay. This has been the biggest
institutional funding in the sector this year, and Snapdeal will use part of the funds to further
develop technology for their business. Another sector that has obtained a great amount of funding is
the wind energy sector. $16 million was raised in the first quarter of this year, versus the $500,000
raised last quarter. E-commerce in India is continuing to grow at a fast pace, and by 2016, the
market is estimated to reach $13 billion.
New Delhi and Bangalore are the top cities for startups in India. There is still, however, a significant
funding gap, with 74% less funding raised in Bangalore when compared to Silicon Valley. Internet
and mobile usage in India is also considerably lower than in the United States, with 39 million
subscribers compared to 208 million in the U.S. This has not stopped entrepreneurs and startups
from continuing to succeed, though. SlideShare, the document sharing service, was founded by
entrepreneurs from Bangalore. Last year, LinkedIn acquired the company for nearly $120 million.
Startup Festival India, an upcoming event that will celebrate and showcase Bangalore’s advances,
will include various startups, including 50 based in the city. This festival will be aimed at allowing
start-ups and entrepreneurs to exchange ideas and learn more about the various initiatives being
done to support them. Even though early stage investments in India are less frequent, the country
has seen an increase in the amount of angel funding received from entrepreneurs, executives in big
companies, and Indian expats. According to 500 Startups venture partner Pankaj Jain, this trend will
help jumpstart support for early stage start-ups.

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Israel
Israel’s entrepreneurs and technologists are world class, and its government has supported the
development of a vibrant venture capital community. Technology start-ups in Israel have benefited
from the country's investment into military technology and training. A large number of successful
technology start-ups can trace their roots back to Unit 8200 (Israel’s NSA), but the best known may
be digital security company Check Point Software. In addition, the government launched a
successful stimulus for technology investors during the first half of the 1990s called the Yozma
program. It acted as a fund-of-funds investor to support foreign firms interested in opening shop in
Israel. The government started by inviting foreign investors to establish venture funds based in
Israel that would invest solely in Israeli start-ups. It selected 10 firms it would support with public
money, offering to contribute up to 40 percent of each firm’s first Israel focused fund.
In the past decade, Israeli start-up companies have raised $5.5 billion from venture capitalists, yet
one thing that the country always seems to be missing is customers. This is because most of their
customers are typically in the EU and U.S. As a result, start-up executives will sometimes set up sales
and marketing in Silicon Valley or the EU to grow their top lines.
At first glance, Israeli VC investment has been down 30% since 2011, as revealed by PWC. Tech
start-ups in Israel raised $867 million in 2012. The MoneyTree Israel report indicates that only 51
Israeli tech companies were able to raise venture-capital funding in the first quarter of 2013.
According to Rubi Suliman, partner at PwC Israel, the growing presence of other investment players
in the marketplace enables a greater number of companies to raise funds from VC sources such as
private funds, incubators, accelerators and angels. In essence, this is good news. Thus, Israel’s
technology sector is maturing, continues to flourish and is considered to be the country’s top export.
One such startup that has become internationally recognized is Conduit, a billion dollar internet
firm, with a web-app marketplace used by over 120 countries. In 2012, Conduit was valued at $1.3
billion, and during the same year, JP Morgan bought a $100 million stake in the company.
PrimeSense, inventor of 3D gesture sensing technology, is used by Microsoft for Kinect. Not
surprisingly, PrimeSense was able to raise $20 million in venture funds last year. The U.S.’s VC firm
Silver Lake, also invested an undisclosed amount in the firm. Today, PrimeSense is used by over 20
million devices around the world. Finally, Newvem, an app which ensures that companies don’t
overpay for Amazon’s Web Services cloud, has raised over $4 million from Greylock Partners,
Innovation Endeavors, and Index Ventures.
According to serial-Israeli entrepreneur Amir Eldad, start-ups are excelling at technology, but
will not have access to global markets unless they work on customer-facing initiatives outside of the
country. For Israeli start-ups looking at prospects in Europe, some are considering the Netherlands
due to its ideal location, good infrastructure, and working capital. Ben Engel, senior Project Manager
of BOM Foreign Investments, located in the southern Brabant area of the Netherlands, is part of
the team working to finalize a program that will invest 125 million euros in foreign high tech
companies. This VC firm, sponsored by the Dutch government, works to attract businesses and

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startups to the area, with powerhouses such as Acer, Apple, Sony, IBM and Dell all having research
centers and offices set up there. Engel explains that while there are a few Israeli companies already
present in the country, he would like to see more, especially in the tech industry. BOM is ready and
willing to fund companies in both the startup and more advanced stages. The Investments Seminar
held in the Netherlands a few weeks ago proved to be a success. Organized in part by BOM, over
100 participants from different companies including start-ups attended. As a result, two or three
Israeli firms have already shown a solid interest in the program and are currently moving forward
with plans to establish themselves in the Brabant area in the upcoming years. According to Engel,
BOM will make investments of 2.5 million Euros in each company. This would also allow Israeli
firms that are looking into European markets to be in closer proximity to Germany, Belgium and
Holland.
Russia
Russia is well respected for its technological prowess and potential to become a lucrative market for
new companies. The country's recent economic boom led the government to create a program to
stimulate start-up creation. It formed a fund-of-funds similar to Israel's Yozma program, but it
required foreign investors to partner with a Russian investment firm to qualify for the stimulus.
Although the energy sector in Russia accounts for nearly 30% of the GDP, only 1% is spent on
research and development. The OECD (Organization for Economic Development), has stressed
that Russia needs a thriving startup culture, especially in science and technology, in order to prosper.
Even though Russia possesses strong capabilities in the fields of technology, science and research, it
has been difficult for the country to obtain commercial success globally. That, however, is starting to
change, since the 2011 opening of the Skolkovo Innovation Center, based just outside of Moscow.
This planned high tech business area, co-chaired by former Intel CEO Craig Barrett, encourages
science and technology companies. Importantly, it has its own set of laws. With funding from the
non-profit Skolkovo Foundation, the nearly 1,000 acre city has border controls and various
incentives, including a 5-7 year tax holiday for start-ups. Additionally, special laws have been created
for entrepreneurs from other countries, allowing them to work at the center. The Center focuses on
IT, Biomedicine, Space and Nuclear Technologies, and Energy, among others. According to Forbes,
VC investments are greatest in the IT sector. In 2011, Russian IT start-up companies raised $237
million, with a total of 139 deals.
In order to further help boost start-ups in the country, Yandex, an Internet search and services
firm, has recently developed a new startup accelerator initiative, called the Tolstoy Summer Camp.
They will help early stage startups and entrepreneurs throughout the whole process; from idea to
launch. According to Yandex, the amount of venture capital on the Russian internet market
outweighs new ideas; however, this new seed accelerator is the optimal format for large internet
companies to successfully interact with many diverse individuals, as well as startups. Yandex will
launch their new program on July 1, 2013, and applicants around the world with Russian language

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skills can apply. In fact, Yandex will cover foreign entrepreneurs’ travel and accommodations
expenses if they have to relocate to Moscow.
EU
Europe is made up of many smaller markets, none of which has the critical mass to create a
consolidated pool of talent and investment money. Still, each country in Europe is free to pursue its
own development strategies, and governments are able to establish policies that promote specific
high-growth industries. The region still imports many of its entrepreneurial concepts from the
United States but is slowly developing its own batch of home-grown expertise. Europe remains the
overwhelming first choice of entry for US VC backed startups which are expanding globally.
Overall confidence in Investing in Europe
Respondent’s Country
2.00
2.17
2.38 2.31
3.90
2.05
2.92
2.25
3.44
1.86
3.41
2.17
2.58
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Australia Brazil Canada China Germany India Israel Japan Netherlands Taiwan United
Kingdom
United
States
Overall

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Germany
Over the past ten years, German start-up companies have raised nearly $13.5 billion from venture
capitalists, and Berlin has recently been deemed as the next startup capital of Europe. In fact, during
last five years, entrepreneurs from various parts of Germany, Europe and the U.K. have been
flocking to the capital city, enticed by its modern culture, relatively inexpensive rent, and well
organized environment for start-ups. Since 2008, about 1,500 companies in the technology sector
alone have started up in Berlin. Organizations such as the Make a Startup Angel Fund have done
tremendous work in the city and in different parts of Europe to create and strengthen ties between
start-ups and capital funding. Despite the fact that there is still a lack on the level of institutional
venture capital available in the city, major venture capital financers such as Earlybird, have recently
relocated from Hamburg to Berlin. Various start-ups such as Soundcloud have blossomed
tremendously over the last few years. The company, founded in 2008 by two Swedes, has over 20
million users and raised a $10 million funding round from Index Ventures in 2011. Today, the
company is valued at $200 million. Wooga (the biggest social-games developer in Europe), and
Jovoto have also blossomed over the last few years.
American investors have, and continue to, recognize the many opportunities of investing in
Berlin. Both Benchmark Capital and Accel, venture capital firms in California, have recently invested
in Research Gate, a network for scientists and researchers. Since 2008, over 3 million researchers
around the globe utilize the network. A wide array of established sectors including IT and
communications, renewable energy, optics and printed electronics have made the city one of the
most competitive in Europe. Unsurprisingly, in the 2010 AmCham Business Barometer, 80% of
surveyors selected Germany as their top European country for investments. In late 2011, Google
established a new Institute for Internet and Society branch in Berlin, with a budget of 4.5 million
euros for the first three years. Google, along with Microsoft, outlined their specific initiatives and
details of the programs they are making readily available for start-ups in Berlin at a recent Founders
Table event.
U.K.
Data released by VentureSource shows that in 2012, the United Kingdom received the greatest
amount of venture capital investment in all of Europe, totaling $2.2 billion, with 295 new deals.
Although this was a 5% decrease from 2011, certain sectors such as the IT industry experienced
significant growth, receiving nearly $250 million in investments. During 2012, almost $960 million
were invested into technology start-ups in the U.K., reaching a 10-year high. This number is
expected to increase in 2013. The majority of investments are being made in internet, mobile and
digital media firms, as well as in new clean tech businesses.

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One area in particular that is thriving with technology startups is the Silicon Roundabout (U.K.’s
Silicon Valley), or Tech City known by some. Located in east London, it is a base for over 600
companies concentrated on a beltway. Earlier this year, the British government invested $80 million
to continue the area’s development. The consumer services sector in Europe also saw a 13%
increase on investments, with a staggering $2.1 billion of funding. More than half of this went to
social media, online shopping companies, and entertainment.
Ireland
Approximately 189 Irish companies in the technology sector raised close to $400 million in venture
capital funding last year. The amount of VC capital funding is expected to increase, with the
continued success of startups like Trustev, a security-tech company. Earlier this month at the Tech
All Star Awards held in London, Trustev won the prize for best startup in Europe. This company
has developed social fingerprinting technology, offering real time online verification. As a result, the
possibility of identity or credit card fraud is reduced..
There has been, and continues to be, an increased focus on IT and biotechnology companies.
Medical device firms also obtained an increase in funding, with over $76 million, and software
companies received around $100 million. Ireland continues to be a favorite spot for global
technology firm market entry. The government provides a vast array of programs which incentivize
large operational and job placement there.
Norway
Norway is one of the richest countries per capita, with an estimated $55,300 GDP per capita. The
country boasts a large amount of VC funds, with thriving sectors in IT, oil, gas, and renewable
energy. In 2012, Norwegian companies received nearly $1.3 billion from VC funding, with ten
different firms in the energy sector receiving a record $950 million in investments. There also
continues to be an increased focus on bio-technology; a firm received $1 million of VC last year.
Fjord IT is a recent Norwegian startup that offers Green Data Power to various cloud, service and
data centers in Europe. The company has opened up its first data space center in Oslo, and is
planning on developing another one late this summer. Fjord IT has created a cooling technology
that is fueled by hydropower, resulting in a lower carbon footprint. As a result, this startup’s IT
services are very appealing to environmentally-conscious businesses around the world. Fjord IT has
raised $2.5 million in VC from investors in Europe and Hong Kong. The total amount of VC
funding Norway received in 2012 was a 20% increase from the previous year.
Latin America
As reported in 2013 Latin American Private Equity and Venture Capital Association (LAVCA)
Industry Data (in collaboration with The Economist Intelligence Unit), last year a record $7.9 billion
was deployed in new investments across Latin America. Overall Latin America continues its steady

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path of growth and positive reform, a positive signal for PE/VC firms eager to invest in the region.
Last year, nearly $8 billion was committed to more than 200 deals in Latin America—with over half
of these deals in the information technology (IT) sector. Startups in IT included e-commerce, data
storage, mobile platforms, outsourcing, and infrastructure. The number of IT deals climbed from
only 18 in 2008 to 104 in 2012.
Chile
According to The Chilean Economic Development Agency (CORFO), the 2013 LAVCA Scorecard
report showed that Chile ranked first in Latin America for the 8th straight year, followed by Brazil,
Mexico and Colombia. This annual Scorecard measures conditions relating to countries’ venture
capital industries and policies, such as tax treatment, relevant laws and regulations, minority
shareholders’ rights, capital markets development and corporate governance requirements.
Chile received high marks for its “strong entrepreneurial environment,” citing CORFO’s financial
support of start-ups as a critical factor. CORFO’s Start-Up Chile and Venture Capital programs
were also mentioned as examples of the “active government support of SMEs and start-ups” in
Chile. CORFO Executive Vice President Hernán Cheyre has referred to Start-Up Chile as an
emblematic program that has “contributed positioning Chile as a regional hub of entrepreneurship
and innovation”. Chile continues to lead on indicators that are generally weak across the rest of
Latin America, specifically intellectual property protection, judicial transparency and the perception
of corruption, and posted an increased score on accounting standards that put the country’s overall
score on par with benchmark nations Taiwan and Spain.
Out of a potential 100 points measuring 13 criteria, Chile for the first time received the same
number of points as Spain at 76. Brazil, Mexico and Colombia received the next highest scores, with
72, 67 and 61 points, respectively.
Chile has one of the lowest costs of starting a business the region due to improvements
implemented in recent years. This marks a significant change from previous years, which is also
evident in the 2012 World Bank Doing Business Guide, where Chile’s ranking on this factor jumped
from 62nd to 27th.
According to Ernst & Young, foreign capital is forecast to boost investment Chile’s growth in the
short term, while low inflation should sustain the real purchasing power of consumers. This,
combined with ongoing employment growth, should mean that private consumption stays robust.
In the medium term, EY expects growth to be underpinned by strong emerging market demand for
Chile’s exports, particularly copper, as well as the stable macroeconomic environment – which
should help boost investment, productive capacity and living standards. But energy infrastructure
bottlenecks could constrain economic growth in the long run, while the reliance on copper leaves
the economy exposed to commodity price volatility in the near term.

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Brazil, Colombia, Peru and others
As it has in past years, Brazil led the region in receiving investments with 72 percent of the total
amount invested and 62 percent of the total number of deals. There are also many positive
developments in Mexico, but Brazil will still likely be the main destination for investments.
According to Patrice Etlin, Advent International’s managing partner based in São Paulo and
LAVCA’s chairman, “It will be a very strong year for Brazil, particularly if valuations start to get
more reasonable with a deteriorating macroeconomic condition”.
In Brazil, where a new reporting code aimed at fund transparency went into effect, scores remained
stable. Both Mexico and Colombia improved their scores as a result of gains on the indicators for
entrepreneurship. Peru also saw an important gain in the 2013 Scorecard, with a reform approved
last year that lifts restrictions on local pension funds investing in private equity in Peru and
internationally. The new regulation reflects a return to a more proactive stance among Peruvian
regulators on this issue, and increases the country’s overall score by two points.
In Central America and the Caribbean scores were generally unchanged, though investor interest in
the smaller opportunities presented by these markets continues to grow, prompting local
governments to consider improvements in their regulatory environment. The Dominican Republic,
where a new administration is tackling corruption, increased its score by three points.
Argentina presents the sole obstacle to progress, as the economy continues to deteriorate, and public
policy presents a hostile environment for foreign investors. The country hosts a vibrant start up
community, but even Argentine entrepreneurs are beginning to look elsewhere for funding and
partnerships.
Mexico
According to the Latin America Venture Capital Association (LAVCA), Mexican startups raised
$469 million dollars in 25 projects in 2011 through venture capital funds, compared to $211 million
dollars raised through 19 deals in 2010. For 2012, LAVCA estimates that VC firms will invest
around $1 billion in more than 30 deals. With the support of institutions and private funds, some
estimate Mexico’s VC industry to reach $100 USD billion dollars invested by 2018.
Mexico has a vibrant entrepreneurial economy, but its entrepreneurs, for the most part, establish
micro and small businesses through self-financing and debt. As a result, those businesses have little
growth potential. In order for Mexico to tap into the potential of its entrepreneurial economy to
create high growth companies, it will be necessary to increase the availability of equity capital. The
Mexican government and multilateral agencies have begun to support venture investment in Mexico.
Private investors have been attracted to Mexico as well, and have established a few private funds for
investment in the country. There are still, however, a number of barriers that inhibit further
development of the venture capital industry. Still, there is vast room for growth in the Mexican
venture capital industry. VC firms in Mexico only deployed funds representing 0.02 percent of the

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country’s GDP, compared to Brazil, the leader in Latin America, where funds represent 0.22 percent
of the country’s GDP.
As we’ve shown, the emergence of a large entrepreneurial community is essential for the
development and growth of any country. For there to be a sizable number of new enterprises and
for these to grow and thrive; they need funding, and this funding usually comes from venture capital
In the U.S., large, venture-backed companies — Amazon, Apple, Cisco, Google, Medtronic — are
major parts of the economic landscape. A recent study by the National Venture Capital Association
and HIS Global Insight estimates that 11% of U.S. jobs were created by VC-backed companies.
In Latin America, on the other hand, the VC industry is still nascent. At a recent meeting at the at
the Multilateral Investment Fund (the investment and granting arm of the Inter-American
Development Bank), Josh Lerner of Harvard Business School said the Latin America VC industry
still has to go through the growing pains that Silicon Valley did 40 or 50 years ago during its
embryonic days.
The growing pains of the VC industry in Mexico are in two dimensions: on the fundraising side and
on the investment side.
Fundraising side
VC fund managers in Mexico are still learning how to achieve trust with investors, the limited
partners (LPs). It takes transparency to achieve this objective, but too much transparency can
sometimes get in the way of effective fund management activities — as VCs spend too much time
keeping their LPs informed and not enough focusing on their investments. Many LPs are also still
learning how best to be effective investors by providing support and demanding accountability,
without micromanaging.
Mexico is also still struggling to build a large enough base of local investors to sustain its VC
industry. Despite several tremendously successful Mexican venture capital investments — such as
microlender Compartamos, where early investors made a 250x gain — most local investors are still
reluctant to invest in early-stage ventures. And many of the family offices and institutional investors
that are willing to make risky investments are hesitant to do so through VC funds — they continue
to prefer to invest directly. This is partly because direct investing has become an attractive activity
for family heirs. The challenge is that few of them have the relevant experience to do it well.
Better incentives need to be established to attract local family offices or institutional investors to VC
investment. How? In Brazil, the government made investment through VC funds tax-free — and
the country now has approximately 130 funds. In Israel, the government put money into VC funds
alongside local investors without demanding a return, thus allowing the private investors to leverage
their returns, thus helping to launch a thriving VC and entrepreneurial scene. In Mexico, the
government has created funds of funds to invest in VC, which has helped. The government,
however, has also been investing directly in companies — making the government a competitor of
VC funds and disrupting the sector's market dynamics.

14
Investment side
Entrepreneurship in Mexico continues to be exceptionally difficult. To manage sector ecosystem
risk, you need to be local. Today the two biggest hurdles in its way are lack of access to capital and
difficulty in dealing with the industry ecosystem risk. To solve the bottleneck, Mexico needs more
money to flow to funds, and more fund managers with business track records who can guarantee
execution. One without the other won't be enough. The challenge is that senior experienced
operational talent in Mexico is not interested in bearing the risk and hardship of working in the still-
struggling VC industry. Government will have to create incentives for experienced professionals to
enter the field. Another issue in Mexico is that few VC funds want to make early-stage investments.
Andres Moreno of Open English shared the story of his company’s fundraising efforts, starting with
a round of convertible notes that took over a year to raise $400,000. The second round of VC
funding took 60 days to raise $43 million, and the next 45 days to raise $65 million. He stressed that
firms such as Kazsek that have invested in Open English are now looking at other deals with Latin
American companies for the first time. So, strong support to the early stage infrastructure and
current angel investing networks is again a big factor.
The U.S.-Latin America Relationship
Investors bringing capital to Latin America often tie funding to a U.S. connection. Serious
entrepreneurial firms will establish an office in California because investors prefer to be close to the
companies they are funding. If there is interest in scaling the service or technology to the United
States, or other experience with the U.S. market, this process becomes easier.
Medina Capital, for example, does not invest in Latin America unless there is a U.S. connection.
They invest exclusively in technology infrastructure such as networks, big data, and cyber security,
and seek companies to mentor and develop in order to bring into the U.S. market. He added that
U.S. companies also have a strong advantage in valuations. A U.S.-domiciled company will have a
significantly higher valuation than the same company with the same product based in Chile or
Argentina.
Still, the reception of Latin American entrepreneurs has changed in Silicon Valley. The region is
gaining attention for its emerging economies, where greater access to credit brings consumer
demand for technology-related services. Ambrose added that Brazil has dominated regional venture
capital investments because firms such as Accel Partners, Tiger Global, and Flybridge recognize
these opportunities. Much like in China, investors saw a market with 200 million consumers eager to
buy over the internet.
Outside of Brazil, companies need to look at either pan-regional enterprises or development for the
U.S. market in order to show the scale needed to attract later-stage investment. Successful deals
often involve the intersection of international and local entrepreneurs.

15
New Ideas, Strong Talent
The people of Latin America are hugely innovative. They’ve had to be in order to survive consistent
economic and political challenges. As a result, there are fresh ideas in Latin America that can be
brought to the U.S. market. Mobile banking is one example, where the technology and platforms
have been developed abroad by companies such as YellowPepper, and now function in the United
States as demand increases for similar services. Another example is a company in Colombia that
operates in the cyber security space, protecting banks from fraud. Latin America has a lot of
experience in anti-fraud and the product set developed by this company was much more powerful
than anything seen in the United States.
Juan Pablo Cappello of Idea.me noted that this trends runs against the grain of mainstream thinking,
which portrays Latin America as a market filled with copycats as opposed to new ideas. Ambrose
added that contrary to popular wisdom in Silicon Valley, there is an incredible pool of talent for
creative professionals and developers, particularly in Argentina and Colombia.
Open English has established service hubs in the region around the best talent. The company found
skilled developers at the best cost in Argentina and set up an office there. They established three call
centers in Colombia, where there were sales and service professionals best-suited for the company.
But the enterprise is headquartered is in Miami, where Moreno said it has access to well-trained
professionals with experience at larger firms working across Latin America. Miami also has the
advantage of being in the United States, which is useful for raising capital.
The Importance of Regulation
As it should be, YellowPepper’s analysis of new markets is driven by regulations. For example,
YellowPepper entered the Mexican market because of a positive regulatory environment, but has not
yet entered Brazil. Investors feel confident in Chile because they are aware of the rules. The legal
framework is less friendly to investment in other markets and should be reformed. Otherwise, why
would a U.S. investor to go Latin America?
Korea
Based on statistics from the Korean Venture Capital Association, VC firms raised $191 million in
the first quarter of 2013, about $2 million more than the amount raised in the first quarter of 2012.
The amount of Korean startups has also increased, doubling to nearly 29,000 in 2012, from just
15,400 in 2008. KakaoTalk is one example of a Korean startup that has grown into a huge mobile
platform. Just six months after its launch by Kakao Corp., the mobile app had one million users.
Today, over 90 million people around the world use KakaoTalk, and the app has recently gained
tremendous popularity in Vietnam and Indonesia. The company has raised over $100 million of VC
funding, the latest from Tencent and WeMade.

16
Korea’s continuous growth can be attributed to a variety of factors. With exceptionally high
standards for education, the country has a diversified economy and a mature, yet still rapidly
growing middle-class consumer base. It has world-class manufacturing sectors in telecom,
shipbuilding, electronics and automobiles. The Korean government is also promoting major
expansions in new sectors, such as clean tech and green energy. In addition, the government has
recently pledged nearly $3 billion in funding for venture companies, specifically for those in the
technology sector. Therefore, the country’s growth outlook is hugely positive.
Japan
Japan is the third largest economy in the world, with market-leading technology in a variety of
sectors. Over the past decade, Japanese startups have raised a little over $7 billion. In 2012, the
country’s stock market increased by 23%, experiencing the biggest gain in seven years. One sector in
particular that is gaining momentum is e-commerce. Locondo, a successful shoes and fashion e-
commerce service startup, has over 300,000 registered members. The company recently raised $6.3
million of VC funding from Excite Japan (one of the country’s leading web portals), Lead Capital
Management, and Itochu Technology Ventures. Locondo’s partnership with Excite Japan, which
boasts 50 million monthly visitors to its portal site, will enable the e-commerce company to increase
its user base.
Two Tokyo-based startups have recently raised a significant amount of VC. Freak Out, which
provides a real time advertising platform for smartphones, received close to $5.5 million of funding
form YJ Capital. Founded in 2012, YJ Capital is the VC arm of Yahoo Japan Corporation.
Accounting SaaS Japan is another thriving startup, providing solutions to Japanese accounting firms.
The company has recently raised $6.6 million of VC from SalesForce.com, GREE Ventures, and
Mobile Internet Capital. A growing number of Japanese companies are seeking to expand their
businesses globally, and will thus require more funds and support from VC investors. Based on its
enormous technology and capital base, we think Japan’s role in Venture Capital has tremendous
opportunity in Japan right now.
Conclusion
Venture Capital financing is one of the few areas in business that the United States will continue to
lead for the foreseeable future. In fact, we believe that the U.S. will maintain that lead for at least
another generation (20-30 years or more). The United States is among the top countries in terms of
technology talent. In addition, the country has been at the startup game longer and more intensely
than anyone else. It has built up an enormous base of technical knowledge, startup business
formation knowledge and a thriving base of wealthy entrepreneurial “alumni” as well as

17
knowledgeable and relatively enthusiastic institutional investors or Limited Partners and investors at
every stage of start-up funding. But although the U.S. commands a huge lead in the VC space, it
does not own the concept of innovation. Many of the IT, internet, media and telecom innovations
from the U.S., are ironically, speeding that globalization process up.
Within the next 20 years or so, I believe we could see China surpass the United States in terms of
deals done and total investment volume, just as it will surpass the United States in total GDP. Until
China, however, embraces the concept of intellectual property protection, it won’t lead in terms of
innovation. More fundamentally, it seems that state controlled capitalism doesn’t jibe with the wild
creativity needed to generate breakthrough innovation. This is probably the point at which
individuality will have to clash with the forces of state power. Although we don’t know how long
that “pause” will last, individuality should eventually win out. When that happens, China’s numbers
will win out as well. China’s ability to produce at a world-class level in a very short period of time is
simply astonishing.
I also think Latin America has enormous potential. They currently badly lack startup formation
knowledge, experience and capital, particularly at the seed levels. But, I would argue that the people
there are naturally very creative and that this may be enough to push the region to achieve great
things in the future. It’s funny; a week ago I would have thought that the region’s government
corruption and poor infrastructure would minimize its potential, like it has done with everything
else. The recent demonstrations in Brazil and the fact that the Mexican government is actually
challenging monopolies give me real hope that the majority of the people realize that their
bureaucracy is the problem and is the biggest factor holding them back. The middle class is finally
getting large enough to “scale”. It will take time to get results, but if Latin America can affect
meaningful change to existing archaic business laws, institutionalized corruption and poor physical
infrastructure, the sky’s the limit. The same could be said for India.
Finally, there remains enormous potential growth in places like DAS (Germany, Austria, and
Switzerland), the UK and Ireland, Korea and Japan. All of these countries have well-established
technology and capital infrastructures. In general, they don’t have the entrepreneurial mindset or
tradition of the United States, but are realizing that they must acquire it if they want to begin
breaking the cycle of low-growth in their respective regions. The good news is that the wind is at
their backs. The rise of alternative forms of startup funding will only enhance the ever-accelerating
effects that technological innovation has on globalization.

Innovation Nations: A Look at the Global Expansion of Venture Capital

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Innovation Nations: A Look at the Global Expansion of Venture Capital